Many thanks to CNBC for inviting me in to discuss China and the implications for Europe and deflation with Arabile Gumede.
In this week's The Week Ahead (Oct 20) we comment:
Although consensus expectations had been for the PBOC to keep their LPR rates unchanged next week, in ‘The Week Ahead’, October 13, we said: ‘Data released over the next week could be enough to push the PBOC to reduce the 1-year MLF rate below 2%, and they also have the opportunity to lower both the 1-year and 5-year Loan Prime Rates on, or before, October 21.’
Some Chinese data, including GDP, was fractionally stronger than consensus expectations, but remained weak overall, which is disappointing given the stimulus and instruction from the authorities since last October, and the cut in RRR in September. Markets now expect a 20bp cut in the LPR for 1yr and 5yr to be confirmed on Monday and further RRR cuts might be expected before the end of the year.
· The House Price Index deteriorated by -5.7%, the steepest drop since 2015 (Beijing, Guangzhou and Shenzhen had some of the steepest declines)
· New Home prices dropped by -0.7% mom in September, the fifth consecutive monthly fall, continuing the fastest fall since October 2014
YTD, the Shanghai Composite is still up 10%, but Chinese stock markets seem to be unimpressed. A lot of the rally is as a result of an allocation shift from small and mid-caps and, over the week, the Shanghai Composite finished virtually unchanged (we have previously highlighted that while stimulus in 2007 and 2015 gave a short term boost to equities, both times markets were quick to fall back).
Since recommending taking profits on USDCNH (a 40 big figure move), the Yuan has depreciated back above 7.12; however, a long term trend below 7.00 remains possible.
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